If you follow Austrian school economics, then you probably understand that the boom and bust cycles that we see today are mostly a result of government policy and central bank policy.  An interesting topic for discussion is whether a boom and bust cycle can occur in a free market, but I think most Austrian followers would agree that booms and busts would be much more mild in a free market environment, if they happened at all.

I think more people are coming to accept the Austrian explanation of what has been happening in the economy.  The Keynesian explanations just haven’t worked out too well and they really don’t make much sense, even to the common man who doesn’t study much economics.

It can still be difficult in discussing the boom and bust cycle with people because Austrian school followers can come across as pessimistic, especially in times like today.  It is not that we want a bust or we’re hoping for a bust.  It is just that a bust is virtually inevitable at this point due to prior policies by the Federal Reserve and the government.

While talking about a “boom phase” indicates a positive notion, this is actually the negative aspect when we are talking about an artificial boom.  Meanwhile, the “bust phase” sounds negative, but this is actually the healing process from the bad things that happened during the so-called boom.  It is true that the bust phase is quite painful for a lot of people as they realize that the good times don’t last forever.

The interesting thing that many people don’t realize, even Austrian school followers, is that the boom phase is also a difficult time for many people, especially near the top of the boom.

One analogy I like to use is to think of a middle class person who is taking an extended vacation.  Imagine this person has $50,000 in life savings and he decides to take a leave of absence from work to spend in the Caribbean.  He spends a few months living in a resort, drinking fine wine, gambling, getting massages, and living the good life.  If an outsider looked at a snapshot of this guy’s life during this time, they would think he was wealthy.  They would think his lifestyle could be sustained.

Unfortunately for this guy, he is in nothing but consumption mode.  He had some prior savings that he was able to use, but not enough to sustain him for a long period of time without working.  Once he blows through his $50,000 in savings and perhaps the use of a few credit cards, he is forced to return to his previous lifestyle.  He will have to go back to work and he will have to save money if he ever hopes to have any kind of a vacation again.

But in this example, the guy had to realize that his lifestyle could not be sustained.  When he was down to his last few thousand dollars, he knew that his time was almost up.  Perhaps he even cut back on the fine wine a little bit, just so that he could stretch out his vacation a little bit longer.

I think of people in the boom phase, particularly near the top, and many are not doing well at all.  If there is a stock market bubble or real estate bubble, then the investors are probably doing well up until the end, or at least they think.  But I can’t help but think of someone who bought a house near the top of the housing bubble in 2005 or 2006.  I suppose this could even apply to some people who bought at lower prices before then.  Think of all of the foreclosures and short sales that ended up happening in the years after.  Many are still happening to this day.

When someone ends up having their house taken from them because they were unable to pay the mortgage, then there were problems building up to that point.  I suppose there are some foreclosures due to people walking away from their underwater house.  But a majority of foreclosures, particularly at the beginning of the bust, occurred simply because people didn’t have the income to sustain the lifestyle that they tried to buy.  They couldn’t keep up with the mortgage payments and all of the expenses that come with “owning” a home.

I can just imagine a family in 2005 struggling to meet the monthly mortgage payments.  They see a boom around them and think everyone else is doing well and is happy.  They wonder what is wrong with themselves.  The husband and wife probably get into fights, thinking they are the only ones in this world who are going to lose their house.  They never should have bought their house in the first place, but they felt they had to because prices would just keep going up.  They stretched themselves too far and simply couldn’t pay their bills.  This is what happens in a “boom” economy.  The boom phase is when all of the damage is occurring and many people will feel the pain before the official bust occurs.

In conclusion, we are in somewhat of a boom phase right now.  Yet, Americans as a whole are struggling now even more than they were 5 years ago.  There is an official bust coming at some point.  But most Americans are already in a bust phase in that they are struggling to pay their bills each month. It isn’t much comfort that the stock market has been doing well to most middle class Americans.